Why is Elliott Wave so Useful?

Written by Ian C.

The most accurate method of forecasting

The first time I came into contact with Elliott Wave was in my first seminar on technical analysis by a U.K. analyst. After the two day introductory course to analysis I returned to my trading room full of enthusiasm, armed with all the patterns and techniques this guru had imparted upon the fledgling analysts, ready to take the market by storm.

However, he clearly he didn't think very much about the principal since his only comment was "wave bye-bye to Elliott Wave."

So what did I have left?

Golden crosses and dead crosses. Tried those - they were almost 100% the opposite of what he taught.

Overbought & oversold momentum. Well good but they don't tell you where price is going and perform so badly in a trend.

Reversal patterns and continuation patterns. Well they didn't happen that frequently and what were you meant to do in the meantime? My traders wanted to know where price was going to go.

I began to read more. Ah! Fibonacci! 38.2% and 61.8% - wow they worked really well… I thought I found the secret elixir to the fountain of profits… Then they suddenly didn't work.

Desperate for clues I read other analysts' commentary on the data vendor platforms. Some provided anemic comments while others actually forecast exact targets and how it would reach there. Some were ok, some were bad (but enthusiastic) and some were actually pretty good. This fascinated me. Who were these guys that were actually forecasting where price would go? How did they do that? The answer was Elliott Wave and it was these services that actually provided real information and had the greatest rate of success.

So I decided to read about Elliott Wave and tried to teach myself. Of course I didn't tell my guru - I didn't want to incur his wrath.

I can guess what some of you are thinking, "yeah, yeah, 12345 ABC." Well basically, yes. But it is a lot more. I bought a couple of books, devoured them and went to my charts to decipher and scribble numbers and letters all over them. It wasn't as easy as the books made them out to be. It was a struggle trying to decide where waves started and ended and how far they would move and I did give up for a period but the problem was that nothing else really gave true forecasting techniques.

So I persisted. I did my analysis and I read other banks' forecasts and tried to work out why they were right - or indeed, why they were wrong. I have to say it took me around 18 months before I felt comfortable using the principal to forecast, and even then it was still a little hit & miss.

As with any form of analysis there are good points about Elliott Wave and there are bad points.

The bad points are:

The counting of waves can be very subjective. There is a common joke that says: "Place 5 Ellioticians in a room with 1 chart for one hour and they'll come out with 20 different wave counts". True…

The development of individual waves can vary dramatically

The experience required to recognize the type of variation takes a good few years and a great deal of patience to acquire

Sometimes waves are impossible to recognize

Filtering wave counts to obtain the most likely ones can be difficult

Elliott's description of the wave structure is actually incorrect for Foreign Exchange - a fact that took me many years to realize

Once you start using the principal it is impossible to look at a chart without counting waves…

It can cause you to make incredibly inaccurate forecasts if not utilized properly. (I recall one analyst that called USDDEM higher from 1.72 to 2.46 and 3.46… it actually went down to 1.44…)

Against that the good points are:

Elliott Wave can predict market moves to the point at times - nothing else can

Waves are related and thus you can use Fibonacci relationships to recognize waves, where they started and where they have greatest chance of ending

It tells you how a move will occur. This is vital

It will warn you that your wave count may be breaking down if the wave development doesn't go as planned

It is the only form of analysis (that I know of) that gives you an understanding of market behavior as if it is an extension of a living force

The principal helps an analyst/trader to understand the structure of a market from monthly charts down to 1 minute charts, a reflection of the fractal nature of markets.

It can provide incredibly easy trades from time to time just using basic guidelines

The biggest element to success with Elliott Wave, apart from several years of experience, is understanding how to filter your wave counts. The very best way is to understand the cyclical nature of the market forces. If the analyst who had predicted USDDEM to move higher to 2.46 and 3.46 had incorporated cyclic analysis he would have seen that the major cyclic pressure was still lower. That in itself will keep you closer to the right count. Cycles have assisted me in recognizing direction to moves and when they should reverse - which combined with Fibonacci projections to structures can allow precise forecasting.

Momentum analysis can help you recognize when the pattern you have been following is breaking down and become more complex. Even a basic guidelines that the last Wave B will provide approximate support or resistance on retest can produce excellent trading opportunities.

So now what are you waiting for? Go pick up a book on the Principal but remember nothing is easy in this market and it will take time and dedication. If there was a simple solution then everyone would use it. If everyone used it, then it probably wouldn't work so well…

About the author

In 2006, Ian Copsey joined GFT as a currency analyst writing commentary and interday analysis. Copsey is one of the foremost forex technical analysts in the world with more than 20 years experience in financial markets. He began his career at Barclays Bank's forex trading room in 1982 then moved to head their foreign exchange sales desk in Hong Kong in 1988 where he spent almost 5 years.

It was in Hong Kong that he studied technical analysis and began to provide forecasts on a daily basis. In 1993 he moved to Tokyo with Dow Jones Telerate as a technical analysis specialist, later as regional manager of technical analysis products, and then continued to develop his unique blend of forecasting tools. During his time in Tokyo, he authored Integrated Technical Analysis (John Wiley & Sons, 1999) which covers his techniques in full. He is an expert indicator and system designer. Ian created the FXS group of indicators and writes the daily Pro Commentary.

Any articles, systems, strategies, reviews, ratings, news, research, analyses, prices or other information contained on this website, by Aboutcurrency.com, its partners or contributors, is provided as general market commentary and does not constitute investment advice. Aboutcurrency.com will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Risk Disclosure: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.